Bank of Rajasthan revises NRE & FCNR rates

Bank of Rajasthan, one of the fastest growing, technology driven and customer friendly private sector bank, has announced a revision in Non-Resident (External) Rupee Deposits (NRE) and Foreign Currency Non-Resident Deposits (Banks) FCNR (B) with effect from September 01, 2008.

(A) NRE Fixed Deposits

As per the revised rates, interest rates on Non-Resident (External) Rupee deposits for :

1 year to less than 2 years has been revised to 3.21% from 3.25% p.a.

2 year to less than 3 years has been revised to 3.31% from 3.50% p.a.

and rate for 3 years and above has been revised to 3.63% from 3.86% p.a.

(B) FCNR Deposits

The interest rate on FCNR (B) deposits in U.S. Dollar for :

1 year to less than 2 years has been revised to 2.46% from 2.50% p.a.

2 years to less than 3 years has been revised to 2.56% from 2.75% p.a.

3 years & above but less than 4 years has been revised to 2.88% from 3.11% p.a.

4 years & above but less than 5 years has been revised to 3.10% from 3.34% p.a.

5 years only has been revised to 3.26% from 3.49% p.a.

The interest rates on FCNR (B) deposits in Great Britain Pounds for :

1 year to less than 2 years has been revised to 5.27% from 5.42% p.a.

2 years & above to less than 3 years has been revised to 4.65% from 4.88% p.a.

3 years only has been revised to 4.63% from 4.87% p.a.

The interest rates on FCNR (B) deposits in Euro for

1 year to less than 2 years has been revised to 4.58% from 4.62% p.a.

2 years and above but less than 3 years has been revised to 4.13% from 4.29% p.a.

3 years only has been revised to 4.03% from 4.25% p.a.

GAIL to double Pata petrochemical plant's capacity

State gas utility GAIL India today said it will nearly double its Pata petrochemical plant's capacity to 800,000 tons in next few years as part of plans to make it big in the chemical business.

"It is proposed to further augment the (Pata) capacity to 500,000 tons per annum (and) gradually going up to 800,000 tons per annum," GAIL Chairman and Managing Director U D Choubey told company shareholders at the annual general meeting.

The Pata plant in Uttar Pradesh currently has a capacity of 410,000 tons.

While Choubey did not give a time-frame or investments needed for capacity expansion, company officials said the expansion to 500,000 tons may take about a year and the time-frame for 800,000 tons will be decided by the board.

The shareholders approved issue of one bonus share for two equity shares held after raising the authorised share capital to Rs 2,000 crore from Rs 1,000 crore currently.

GAIL is looking to set up a mega petrochemical plant along with a private firm in North Asia and Central Asian states, Choubey said but did not reveal the name of the private firm. Officials however identified the company as Reliance Industries.

The company, he said, will invest Rs 20,000 crore in building new pipelines to transmit 300 million standard cubic meters per day of gas by 2011-12. "Five new trunk pipelines and two capacity augmentation projects are moving forward rapidly."

Phoenix Mills partner firm lines up Rs 450-cr spend

Entertainment World Developers (EWDPL) India, which builds malls in
central India and partners property developer Phoenix Mills, plans
to deploy $105 million (nearly Rs 450 crore) in developing multiple-
use properties, including malls and hotels, in tier-II and tier-III
cities across the country.

Recently, German realty fund MPC Synergy invested Rs 1,300 crore in
various special purpose vehicles of EWDPL and Phoenix Mills, which
are developing realty projects across the country. MPC Synergy
picked up 16 per cent to 49 per cent in the respective SPVs.

Phoenix Mills holds 40 per cent stake in Indore-based EWDPL.
According to the investment plan, EWDPL will spend nearly $85
million in six cities. Remaining $20 million will be used in EWDPL's
proposed projects in Thiruvananthapuram and Nagpur, said Manish
Kalani, managing director of EWDPL India.

Welspun Gujarat plans Rs 1,000-cr capacity hike

Welspun Gujarat Stahl Rohren, one of the largest steel pipe makers in
India, has decided to increase the capacity of its pipe plant by 75%
to 1.75 million tonnes to meet growing demand for oil pipelines.

The expansion is estimated to cost the company Rs 1,100 crore, which
will be funded through a mixture of debt and internal accruals,
company president Akhil Jindal told ET. "About Rs 800 crore will be
through debt, while the rest will come from our accruals," he said
adding that their borrowing cost has been pegged at about 10%.

Jindal Steel and Power Ltd (JSPL) will invest Rs 18300 crore in Chhattisgarh

Jindal Steel and Power Ltd (JSPL) will invest Rs 18300 crore in
Chhattisgarh to set up a steel unit and a 1,000 MW captive power plant.

The company has signed a deal with the Chhattisgarh government to
invest Rs 18300 crore for a 4 million tonne per annum (MTPA)
integrated steel plant, including a 1,000 MW captive power plant at
Raigarh

JSPL already has a 3 MTPA steel unit at Raigarh, some 220 km north of
Raipur. According to the agreement, the company will invest Rs 5000
crore on the captive power plant out of the total Rs 18300 crore

Punj Lloyd - Hot Chip Pick for This Week

Scrip Name: Punj Lloyd - BSE code: 532693 Volume: 4936613 CMP: Rs 279.90

The group is a diversified infrastructure conglomerate and has a formidable presence in engineering and construction along with interest in power, cement and hospitality. According to some market sources, the counter with higher order book seem to provide short term capital appreciation down the line and considering the same, the counter has been accumulated by the big players. The counter has witnessed higher volumes with higher deliverable quantity with a price band of Rs 275-280, which indicates further potential in the counter. On the technical front also, the measuring tools support the upward trend in the scrip.

Tata Motors first to offer 'differential' rights issue

To raise Rs 4,147 crore to fund Jaguar, Land Rover buy

Tata Motors will raise Rs 4,147 crore through a rights issue that will comprise both ordinary shares and those with differential voting rights, called “A” ordinary shares.

This will be the first time that an Indian company is issuing shares with differential voting rights. The issue which is slated to open at the end of this month, will also be India’s first fast-track rights issue, a dispensation under which the Securities and Exchange Board of India (Sebi) allows quick approvals.

The ordinary shares will be priced at Rs 340, a 21 per cent discount to the current market price of Rs 430 and will be offered in the ratio of 1:6. The “A” ordinary shares will also be issued in the ratio of 1:6 but will be priced far lower at Rs 305, a discount of 29 per cent.

Moreover, these shares will attract a dividend that is five per cent higher than that on ordinary shares.

However, shareholders owning these shares will be entitled to only one vote for every 10 shares held, though they will get all the financial benefits — splits, buybacks and rights — much like an ordinary share. “A” ordinary shares will account for about 12.3 per cent of the equity of the company after the issue. “We believe there are investors who prefer holding shares that attract a higher dividend and do not mind having fewer voting rights,” said N Soonawala, director ,Tata Sons.

Soonawala added that such shares typically trade at a higher price, compared with ordinary shares.

The rights issue is being made to help repay the bridge loan of $3 billion taken to fund the acquisition of Jaguar and Land Rover, completed in June 2008.

C Ramakrishnan, president and CFO, Tata Motors, said the loan is to be repaid by June 2009. Ramakrishnan added that a part of repayment will be made by selling investments held by Tata Motors worth Rs 2,000-Rs 3,000 crore. The sale of these stakes in various companies, he said, has already begun.

The Tata Motors scrip closed at Rs 430 on Tuesday. The stock has lost 32 per cent since the issue was announced on May 28, 2008 when the price was Rs 634.75.

All you need to know about ETFs

Thanks to the launch of a number of gold ETFs (exchange traded funds) in the recent past, ETFs as investment avenues have gained a fair bit of popularity as well. Increasingly, ETFs are finding themselves on the investor’s ‘to invest’ list. Having said that, ETFs still have a lot of catching up to do, before they can compete with conventional mutual funds, in terms of popularity among investors. One of the primary reasons for this is lack of knowledge and objective understanding about ETFs among investors. In this article, we present a primer on ETFs and discuss their investment proposition.

What are ETFs?
ETFs are a basket of securities that are listed and traded on a recognised stock exchange. Simply put, they are mutual funds, whose units can be bought and sold on the stock exchange. ETFs can be either passively managed or actively managed.

A passively managed ETF attempts to replicate the performance of its underlying benchmark index (like the S&P CNX Nifty, for instance). It invests in the same stocks as the index and in the same weightage as well. The intention is to track the index as closely as possible (i.e. with least deviation).

On the contrary, an actively managed ETF can freely invest in stocks/securities, within the guidelines laid down by its investment mandate. In other words, the fund has no obligation to invest in the same stocks/securities as its benchmark index. The intention is to outperform the benchmark index.

However, it must be noted that the defining feature of ETFs is not whether they are passively or actively managed, but that they are traded on the stock exchange.

ETFs in India
ETFs first made their presence felt in India in the year 1994 with the launch of Morgan Stanley Growth Fund, a close-ended, actively managed, diversified equity fund. However, the dismal track record of the fund combined with a price history that was trading perpetually at discount to the NAV, gave investors the wrong signal as far as ETFs were concerned. Investors began perceiving ETFs as poorly managed and felt short-changed when they sold their units at a steep discount to the NAV.

Things changed after the launch of Nifty Benchmark Exchange Traded Scheme-Nifty BeES (launched in December 2001), an open-ended, passively managed fund. It would be fair to say that the fund set the records straight for ETFs in the country. Since then, the ETF segment has grown slowly but steadily. Recently, the launch of gold ETFs has provided the much needed zing to the segment, thus attracting many investors.

ETFs at present have a fair variety to offer. For example, among others, there are ETFs like Quantum Index Fund and ICICI SPIcE Fund that track broad indices such as the S&P CNX Nifty and the BSE Sensex respectively. Then there is Bank BeES (from Benchmark Mutual Fund), an ETF that tracks CNX Bank Index. On the debt side, there is Liquid BeES that invests in a basket of call money, short-term government securities and money market instruments. And there are several gold ETFs to choose from. Going forward, investors can only expect the bouquet of ETF offerings to grow.

How ETFs function
Given that an ETF is traded on the stock exchange, its price may not necessarily be the same as the NAV of the underlying portfolio. In other words, an ETF could have an NAV distinct from its market price. The reason being that the market price is usually driven by the demand and supply of units. Hence there is a distinct possibility of an ETF’s units trading at a premium or discount to its NAV.

Unlike regular mutual funds, where the investor deals directly with the AMC (asset management company), in case of ETFs, a bulk of the buying and selling is done over the stock exchange. Direct dealing with the AMC is possible only if the transaction is done in specified lot sizes known as ‘creation units’. Since the creation units are comprised of a large number of units, they are not viable propositions for retail investors. It is possible only for institutions and wealthy individuals to deal directly with the AMC. While dealing with the AMC, such investors can avail of ETF units by delivering the stocks (assuming that the ETF tracks a stock index) that make up the underlying index; also ETF units can be exchanged for the underlying stocks.

AMCs attempt to keep the market price of the ETF close to its NAV; for this purpose, they appoint institutions commonly referred to as market makers. These market makers try to benefit from any premium or discount between the ETF’s market price and its NAV, by performing an arbitrage between the ETF and its underlying portfolio. So how does this mechanism work? If an ETF is trading at a discount to its NAV, then the market maker will buy ETF units from the stock market and then sell the same to the AMC (in creation units); after taking delivery of the underlying stocks, the market maker will sell the same in the stock markets, thereby benefiting from the arbitrage opportunity. The converse will be done when an ETF is trading at a premium to its NAV. The arbitrage mechanism helps to keep the market price of an ETF close to its NAV.

Let us now look at some of the advantages and disadvantages associated with ETFs.

Advantages of ETFs

1. ETFs tend to be more cost-effective vis-a-vis comparable mutual funds. For instance, while the expense ratio of a passively managed ETF (tracking a benchmark index) would normally be in the range of 0.50%-1.00%; for an index fund, it can be as high as 1.50%.

2. Another important advantage with ETFs is that they provide more flexibility to investors than regular mutual funds. Since they are traded on the stock exchange, they are available to investors any time during the trading hours. So investors can buy and sell units of an ETF on a real time basis, unlike regular mutual funds, which can be transacted only at end-of-day NAV.

3. Since ETFs witness most of the buying/selling on the exchange, the interests of the long-term investor are not compromised. Take a regular equity fund where units are bought and sold at the AMC’s end – when a significant amount of money enters and exits the fund rather quickly, the long-term investor could suffer as a result of the costs (trading costs, registrar costs and opportunity loss, if the fund manager is forced to sell his best stocks) associated with this quick inflow/outflow.

With an ETF, since the trading investor does not approach the AMC at all and only interacts with other investors over the exchange, his quick entry/exit does not compromise the interests of the long-term investor.

4. Given ETFs are traded on the stock exchange, and can be bought/sold on a real time basis; they tend to have low tracking error (deviation of ETF's performance from that of the underlying index) as compared to index funds.

Disadvantages of ETF

1. Investors need to have a demat and a trading account, with a SEBI registered stockbroker, for investing in ETFs. For investors, who do not trade in stocks, this could be a bit of a deterrent. Also, maintaining a demat account entails paying annual fees (approximately Rs 500), however the same varies across stockbrokers. For investors, who invest in stocks, this will not pinch as the maintenance charge of the demat account will be spread across the stock and ETF investments.

2. While investors have to incur entry/exit loads at the time of making/redeeming investments in mutual funds, for ETFs they have to pay a brokerage (usually around 0.50%) to the stockbroker, along with other applicable charges (STT for instance), every time ETF units are bought or sold. For a trader who frequently trades, this can have a significant impact on the net returns. But for long-term investors, these expenses hold little relevance.

What investors must do
It is evident that ETFs offer a different investment proposition vis-à-vis conventional mutual funds. ETFs may appeal to investors who want to track the performance of a particular benchmark index (such as S&P CNX Nifty or BSE Sensex); similarly, the ETF route can also appeal to investors who are desirous of investing in asset classes such as gold. The allure of ETFs will only grow given the expanding bouquet of offerings.

Investors on their part would do well to thoroughly understand the pros and cons of ETFs; this will help them make informed investment decisions. Also, investors must consult their investment advisors/financial planners to determine the suitability of an ETF in their investment portfolios.

Are structured products good enough?

Amidst the stock market volatility, it is not surprising to find investors who have all but redeemed their investments. Considering the losses incurred, investors are now exploring investment opportunities in avenues beyond equities. These avenues even have a fancy name – structured products.

Structured products, is the latest buzzword among investors and fund houses alike. Many investors are enticed by the investment proposition offered by these products. Fund houses on their part are only willing to launch more products to feed their popularity among investors.

Most investors believe that structured products are designed in a manner that equips them to deliver superior returns. Besides, they also consider them to be less risky.

Before we explore this subject further, let us first understand what structured products are. As the name suggests, these are customised products that comprise of various financial instruments (derivatives, stocks, bonds and debentures, among others) and investment strategies in one investment.

These products were initially made available to cater to the needs of a specific group of investors (mainly high net worth investors). However, they are now being offered to retail investors as well. To that end, the concept of structured products is relatively new for retail investors.

Terms like derivatives, paired trades and equity-linked debentures among others, have enticed a lot of investors into investing in these products. A strong marketing pitch by fund houses combined with fancy terms/investment strategies leads them to believe that structured products are superior to regular mutual funds. However, there are certain elements that investors need to consider before investing in structured products.

While the advantages offered by structured products are widely-advertised, investors would do well to understand their downside in order to make an informed investment decision. We put forth some of the disadvantages associated with structured products.

1. Complexity
Structured products are not as simple as they are usually made out to be; they are quite complex. Since they use a blend of investment strategies, it is difficult for most investors to understand the strategy driving the fund. Expectedly, investors aren’t aware of the situations when the strategy might fail to deliver.

2. Misrepresentation
Fund houses usually compare the indicative return on structured products with other seemingly comparable instruments. While there is nothing wrong in doing so, the problem arises when the returns are misrepresented. For instance, one of the recently launched structured products compared its indicative returns, in absolute terms, with returns in CAGR (compounded annualised growth rate) terms, offered by another seemingly similar instrument. Both these measures are incomparable.

For example, a 15% return (in absolute terms) over 2 years would actually mean 7.24% CAGR over a similar time frame. However, if investors are being led to believe that the structured product will yield a 15% CAGR over a 2-Yr period when it’s likely to deliver a 15% absolute growth over a 2-Yr period, it’s a case of misrepresentation. To that end, comparing such returns would lead investors to making a wrong investment decision.

3. Capital protection
Most structured products belong to the capital protection category. In other words, they aim to protect the investor’s capital in any market condition. Given that the larger portion of the fund is invested in debt and the rest is invested in equity, the chances of achieving the stated objective appears to be high. However, these products do not talk about the credit risk involved in the debt component. Although these funds aim to protect the investor’s capital, the chance of the fund not achieving the same does exist.

4. All season fund
Some of the structured products claim to perform across market conditions. Too good to be true, isn’t it? This is simply because, these products are designed in such a manner that if the fund manager runs out of investment options, the fund can have a higher cash component. Subsequently, the fact that this will hurt the fund’s performance is rarely revealed.

What should investors do?
Investments in instruments like structured products should be made only after there is a clear understanding of its investment proposition, risks involved and the returns projected. If the investor can unravel the structure and can take on the risk for that additional return, then he can consider investing in them. The investor who finds the process of evaluating them difficult, must render the services of a competent financial planner and take a well-informed decision accordingly.

SIPs: A long-term investment strategy

Systematic Investment Plans (SIPs) are much misunderstood. For one, investors often mistake SIPs as an investment avenue rather than a mode of investing in mutual funds. Then there are investors who invest in SIPs expecting quick results without fully appreciating the need to invest via SIPs for the long-term.

Minimum tenure of an SIP
Another misconception investors have about SIPs is with regards to the minimum tenure. Most fund houses have a minimum SIP tenure of 6 months. This leads investors to believe that 6 months is the ideal time frame for investing via SIPs (just like a lot of investors invest Rs 5,000 in mutual funds simply because that is the minimum investment amount for several mutual fund schemes).

In our view, investors should ideally invest via SIPs over at least 2-3 years. This way they can exploit the most critical benefit of an SIP – rupee cost averaging. Let’s understand how this is possible.

For an SIP to deliver the goods, it must witness a falling market. This way the investor can average out his cost of purchase. If the investor does not witness a downturn, i.e. he is only exposed to a market rally, the average purchase cost of his SIP will rise over a period of time.

SIPs in a rising market

Month of investment	NAV (Rs)	No. of Units
January	11.00	45.45
February	12.00	41.67
March	12.50	40.00
April	12.90	38.76
May	13.25	37.74
June	13.40	37.31
Avg. purchase cost of 6 SIPs	Rs 12.45

(The example is for illustrative purpose only.
We have assumed that the SIP is done on the first trading day of the month; SIP amount is Rs 500.)

In the above table the average purchase cost of the SIP is Rs 12.45. Clearly, the SIP has not worked in the investor’s favour. Why is that? Because if he had instead invested lumpsum in January, his purchase cost would have been Rs 11.00 as opposed to the average purchase cost of Rs 12.45 over a 6-month period.

SIPs in a falling market

Month of investment	NAV (Rs)	No. of units
January	11.00	45.45
February	12.00	41.67
March	12.50	40.00
April	12.90	38.76
May	13.25	37.74
June	13.40	37.31
July	12.10	41.32
August	11.20	44.64
September	10.30	48.54
October	10.10	49.50
November	10.50	47.62
December	10.20	49.02
Avg. purchase cost of 12 SIPs	Rs 11.50

(The example is for illustrative purpose only.
We have assumed that the SIP is done on the first trading day of the month; SIP amount is Rs 500.)

However, if the investor had opted for a longer investment tenure of say 12 months, he could have benefited from greater fluctuations in the mutual fund’s NAV. These fluctuations which arise over a market cycle lower the average purchase cost of the SIP over the long-term.

This is apparent from the above illustration. As is evident from the table, if the investor had taken an SIP for 12 months (instead of 6 months) his average purchase cost would have declined to Rs 11.50. Compare this with the average purchase cost of Rs 12.45 for a 6-month SIP.

It can be argued that there is no way for the investor to know when there is likely to be a turnaround in the markets (in this case a downturn). That is exactly our point. Since the investor does not know when markets will fall (and lower his average purchase cost), he must opt for a longer SIP tenure. Or at least he must manage his investments in a manner so that when his existing SIP terminates without witnessing a dip in stock markets, he can extend it further. This way should the markets fall, his SIP can benefit from a dip in the mutual fund NAV which in turn will lower his average purchase cost.

Points to remember before opting for an SIP

1) Ironically, while SIPs are meant to eliminate market-timing, investors must opt for a long-enough SIP tenure so as to ‘time’ the market downturn.

2) SIPs are equally beneficial in a falling market. Most investors believe that lumpsum investments (as opposed to SIPs) prove more beneficial in a falling market. This is only partly true. Having an SIP in operation during a falling market can ensure that investors stand to benefit should markets fall even further.